Stocks drifted lower again last week, as the S&P 500 index fell 1.1 percent. Since peaking in early March, the index has retreated by a still-modest 2.8 percent, but stocks are searching for a positive catalyst. Last week’s decline was the second in a row, and fourth in the past six weeks.
First quarter earnings season began with favorable reports from Citigroup and JP Morgan Chase, but that was not enough to refocus investor attention away from geopolitical concerns that are suddenly front and center, from North Korea, to Syria, to Afghanistan. Evidence of weak economic activity to start the year is also pressuring sentiment.
While stocks were declining, bonds were benefitting. The yield on the ten-year Treasury tumbled from 2.38 to 2.24 over the course of the Good Friday-shortened trading week. It was the lowest closing yield since mid-November, and pierced the lower bound of the 2.30-2.60 yield range in which the ten-year has been trading for most of the past four months. The spread between the two and ten-year notes has now collapsed from a peak of 136 basis points in mid-December to 103 last Thursday.
The shift to relative safety once again took a toll on financial stocks, banks in particular. The BKX ETF dropped 3.2 percent last week and has fallen 11.4 percent since the markets peak on March 1. Over that time the BKX has risen on just nine of 31 trading days.
Earnings will once again attempt to provide some support this week. Bank of America, Goldman Sachs, and Morgan Stanley will attempt to revive the banking sector, while a range of bellwethers from Netflix to UnitedHealth, J&J, IBM, Verizon, and GE try to do the same for the broader market.
China reports growth; France prepares for election
There was a bit of good news on the economic front, this time from China, which reported first quarter growth of 6.9 percent, above the official full year target of 6.5 percent. It was the second straight quarter of accelerating growth, after posting a 6.8 percent rate in last year's fourth quarter. From the end of 2014 through the third quarter of last year, the Chinese economy had slowed from a 7.0 percent pace to 6.7 percent.
The political calendar will shift to France this week, where the first round of presidential elections take place next Sunday. The polls show a tight race, with a recent surge by far-left candidate Jean-Luc Melenchon. All four leading candidates are within three percentage points of each other, according to the latest Ipsos-Sopra Sterna poll. Many voters remain undecided, while many others say they will abstain altogether.
The week ahead
This week's economic calendar is fairly light, although it does include reports on the housing sector, including starts, permits and existing home sales. Industrial production and flash purchasing managers index reports are also scheduled. Last week included a surprise drop in consumer prices. The Consumer Price Index fell 0.3 percent in March, pushing the year-over-year rate down to 2.4 percent from 2.6 in February. The core rate also fell, dropping 0.1 to lower its trailing twelve-month pace to 2.0 from 2.3 percent. Retail sales in March were also soft on weakness in auto sales.
The advance estimate of first quarter GDP is scheduled for release on April 28. The Bloomberg consensus forecast now anticipates growth of just 1.3 percent. That would be the weakest quarter since the economy grew at a 0.8 percent pace in last year's first quarter.
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The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill. It is not possible to invest directly in an index.
The BKX bank ETF tracks an index of the KBW Bank Sector (BKX), which is a capitalization-weighted index composed of 24 geographically diverse stocks representing national money center banks and leading regional institutions that are publicly traded in the U.S. BKX is based on one-tenth the value of the value of the Keefe, Bruyette & Woods Index (KBWI). ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. 
The Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. Changes in CPI are used to assess price changes associated with the cost of living.
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